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Tuesday, January 20, 2015

On Smith on Rowe on Krugman on Friedman

Nick Rowe wrote a post "There are no Friedmans today, except maybe Friedman himself" which I admit I haven't read.

Rowe declared Milton Friedman the victor of, at least, the macroeconomics debate. Without reading his post, I thought (and commented at Brad Delong's blog) that the battle isn't over and that the other than Friedman forces are currently winning back lost ground. In other words, I agree with Rowe (and an earlier post by DeLong) that Friedman's thought is the main stream of macroeconomics, although it is, oddly, called new Keynesian.

Noah Smith has 5 excellent questions for Nick Rowe. Do read Smith's post (for one thing he has read Rowe's post). My comment

As usual, I think this post is excellent (I guess I should save pixels by leaving that part out).

I definitely agree that mentioning Marxists is a bit odd. Marxist economists were marginal in the 70s. I don't think it makes sense to use the same word for Keynesians and Marxists together at all.

I do not recall widespread support for price controls among mainstream left of center economists. I definitely do recall hearing Robert Solow say that, while he doesn't have any strong ideological fixation on free markets, wage and price controls are just bad policy. Here (and always) I think that claims about what was generally said and written should be ruled out of order unless backed by names and citations. I personally recall hearing what Solow said on the topic in a Kennedy School public debate on what to do about high inflation. Update: Nick Rowe in comments links to Tobin (see next paragraph). My vague recollection of what I heard from economists when I was a biologist does not seem to be reliably intellectual history. I score this one Rowe 1 Waldmann ... hey I was just blogging at my personal blog and I just asked I didn't assert.

Or to put it another way, I am interested in Friedman vs Samuelson, Solow and Tobin.

Actually I have a challenge. Name a Friedman Solow debate which, with the benefit of hindsight, we agree was won by Friedman. I do not think this is easy to do.

I was alive in the 70s although kinda young and not an economist. I remember almost no discussion of wage and price controls after 1973 (when Nixon who was not Galbraith imposed them).

I recall extensive discussion of whether central banks should target interest rates or the money stock. This is a debate which Friedman won, leading to a shift in the late 70s to targetting the money stock, then lost in around 1982. How often do you read about the quantity of money ? How much did it grow in the past year ? Monetarism wasn't just the claim that monetary policy matters, but also the claim that the quantity of money was the key variable, because velocity is stable and predictable. This, the absolutely central aspect of monetarism according to Friedman, seems to have been conveniently forgotten by March 2008 at the latest. Or to put it another way, Friedman and new Keynesians have a lot in common, but also disagree on something Friedman considered extraordinarily important.

Your point 4 is related to your point 1. Rowe defines the left so that universal health insurance and environmental regulation are not leftist. It isn't as if people far to the left of Friedman ranging from Samuelson to Che Guevara are so similar that it is useful to discuss them together. Friedman, however, definitely advocated deregulationa and a sharp reduction of the state which haven't happened. He and Rose Friedman wrote a book called "The Tyranny of the Status Quo" during the Reagan administration. This is not a title for a book written by someone who won the policy debate (you may correctly guess that I haven't read the book).

Finally, you Rowe and I agree that Friedman dominated academic macroeconomics in 2007 with new Keyenesians better labeled Friedmanites. However, there have been some rather shocking new data since then leading to heated debate and making it a very odd time to try to decide who won the debate.


Jim Rootham said...

One thing you need to remember about Nick Rowe's perception of the left-right spectrum. He's Canadian, so universal health care is not a left issue.

Robert said...

Yes indeed. I did think that his perception of what the left thought is related to being from some country other than the USA. I didn't type it. I didn't notice the connection of nationality and the idea that Galbraith was the leading alternative to Friedman.

Our troubles communicating could be worse. I now live in Rome and have great difficulty getting my head around what leftists over here thought back in the 70s (notably the Communist party didn't count as really leftist back then). I know a few pretty hard core pro market righties who are extremely ex Leninists (as well as moderate social democrats who are moderately ex Leninists).

Nick Rowe said...

Robert: James Tobin 1983 "The case for Incomes Policies" is one very important name and citation. I think it is fair to say that Tobin was the leading Keynesian money/macroeoconomist of his era. He lists other names.

"Why did Marxism/socialism fail to make headway in the US?" used to be a stock question that marxists would ask. And it's a good question, though I don't remember their answers. The US is an exception.

I used to hang out with CP members in the 1970's, for a couple of years. That was in the UK. And with sociologists a bit too, and British (and to a lesser extent Canadian) sociology was heavily Marxist. They tolerated me, laughingly calling me a "fascist", because they thought I was an irrelevant part of the old order. But they hated the Trotskyites, who they saw as a real threat. They would sing "24 for the holes in Trotsky's head" and make little ice-pick motions when they saw them pass. One CP member once swore me to secrecy then told me of the self-criticism session she had faced at a party meeting, that had upset her terribly. The Italian CP was soft Euro-communist. The smaller British CP was harder.

It is all very hard to imagine now, but it was once very real, and seemed all-pervasive in intellectual life. They seemed sure to win, either quickly or slowly. Because it was the natural order of things, Marx had a theory, and any resistance was either self-serving or false consciousness.

Robert said...

Welcome Nick. Recall I admitted I hadn't read your post. Almost no one reads this blog which is for stuff I write which isn't worth reading (Mark Thoma makes it something else entirely when he links to a post).

Yes Tobin is certainly a top Keynesian. In fact, I asked exactly for cites of Samuelson, Solow or Tobin. I should click the link and read the Tobin article.

I think the discussion of what "the left" means shows that the concepts of left and right, while very valuable, are also necessarily simplistic. Modelling opinions as points on a line is modelling, with usual advantages and costs. On the right, libertarians and the religious right have very little in common.

In any case, I am still for some reason interested in the old long fought debate Friedman vs the old Keynesians. I agree with you (and Brad) that new Keynesians generally side with Friedman. But I just disagree with Friedman and the new Keynesians. I note NK models don't fit the data very well.

Nick Rowe said...

You are right that Friedman lost on the k% rule, though I don't think of the k% rule as truly core to Friedman's views, more a case of "this won't work that great, but it will be better than what central banks have been doing up to now". We don't notice the Friedmanite water we swim in, and define "Friedmanite" only in terms of the thing that sticks out as not part of the natural order of things.

More generally, Friedman lost on base control vs interest rate control, as the instrument. But paradoxically, he won in 2008, because "Quantitative Easing" is just a silly new name for Friedmanite base control.

"Actually I have a challenge. Name a Friedman Solow debate which, with the benefit of hindsight, we agree was won by Friedman. I do not think this is easy to do."

Who won the debate and who was right, aren't always the same thing. Lets list their "wins":

For Solow: I can only think of the Solow Growth Model, and Solow Growth Accounting. Solow "won" on those, because we continue to use them and teach them, regardless of whether some might say they are wrong. (Though I don't think you can say that Friedman "lost" those.)

For Friedman: Permanent Income, expectations augmented Phillips Curve/natural rate, the idea that the central bank is responsible for inflation, the idea that monetary policy should be a policy rule and not policy actions, AD should be assigned to monetary not fiscal policy (those 5 are all central to standard macro now), flexible exchange rates, and that's just macro. In micro it's more mixed, but volunteer army, maybe school vouchers (now inside the Overton Window, at least), stop nationalising things (look outside the US for that one)

I'm not sure on methodology, but I think the way we mix models and empirical is closer to Friedman's view than what economists would do when he wrote his thing on positive economics, which had a very instrumentalist view of models, which is now very mainstream.

Nick Rowe said...

The fixed vs flexible exchange rates is a biggie, that we tend to forget. When Canada floated it was breaking the Bretton Woods rules for civilised countries, and the only(?) economist supporting us was that nutjob Friedman. Nowadays flexible exchange rates are part of the natural order of things, so we don't notice them, but they certainly weren't when Friedman advocated them.

Robert said...

I'm not sure I should post this reply. It might be too heated in tone. I guess I will warn the reader and post.

Wow that's a lot. I was thinking of the expectations augmented Phillips curve which is in Samuelson and Solow 1960.

The PIH is overwhelmingly rejected by the data. AD asigned to monetary not fiscal included the claim that monetary would work if one kept money supply up. We now post 2009 know that Friedman was totally wrong on that. AD monetary not accepted even by all policy makers but the general rejection of fiscal stimulus is not evidence that fiscal stimulus is a bad idea. Terrible perfomance tends to suggest that the current conventional wisdom is wrong. Of course I know I risk restarting the usual debate about monetary policy at the ZLB and just ask to leave it out of this thread. The recent evidence tends to support the idea that fiscal works and is useful while, as to monetary, we can maybe refrain from arguing here and now about whether it didn't work just because they did it wrong.

I recall Samuelson advocating flexible exchange rates (something I read with his name on it).

And the natural rate. Uhm I live in Italy. Notably, in this continent the natural rate is always about equal to the current rate which varies enormously.

As should be clear, my idea of winning a debate is presenting stronger evidence. I guess what I meant is let's re-open and Friedman Solow debate (we have to agree on what they said and we will not debate an expectations unaugmented Phillips curve). We certainly agree that Friedman dominates the macroeconomics profession. But I don't think you can make a case on his behalf based on data and evidence.

I agree that the macro profession is now mainly Friedmanite. However, his victories are of two types -- defeats of straw men and defeats of the facts.

he has done especially well against the data. Models with no empirical success whatsoever which are overwhelming rejected by the data are considered central to what we know.

Alan Marin said...

I think that the dicussion on the original Rowe and Smith blogs, and even here, mixes-up the 1970s views of several groups: academic economists, other "intellectuals", policy makers and the general public.
I studied economics in the 1960s (LSE and MIT) and was a new member of the the economics department of LSE from 1970. I am sure there were no CP members in the Department and think there were very few in other LSE departments.
Neither in the 1960s nor in the 1970s did academic economists take Galbraith very seriously.
As stated by others in these blog comments, Solow, Tobin, Modigliani etc. did not dispute that monetary policy could affect aggregate demand (outside of a liquidity trap, which was seen as no longer relevant by these 1970 Keynesians). They disagreed with Friedman who was taken as saying that in practice only monetary policy could have such effects. They also disagreed that monetary policy should only be viewed via the quantity of money and spoke much more of affecting interest rates (Tobin and Modigliani concentrated on this aspect).
On the latter, New Keynesian models are much closer to Tobin than to Friedman.
Finally, for now at least, I think that on the crucial Rules vs. Discretion 1970s disagreement between Friedman and the Keynesians, current practice fits neither exactly, but is closer to the Keynesians. Nick Rowe overstated the Friedman "victory" by ignoring the distinction between instruments and targets. Steady inflation is now viewed as a target, but Central Banks are given full discretion over their use of the instrument. This is very different than a Friedmanite rule of a steady increase in the quantity of the monetary base. Central Banks do not even commit to an explicit unvarying Taylor Rule, which would have been closer to a Friedman type of rule. Simiilarly, CB monetary policy does not take Friedman's view that the lags in the effects of policy are so long and variable as to make any response to current events undesirable.

Robert said...

What Alan Marin said. I agree with all of that. In a later post I fumbled towards the point that current monetary rules are targets not instruments.

Anonymous said...

"They seemed sure to win, either quickly or slowly. Because it was the natural order of things, Marx had a theory, and any resistance was either self-serving or false consciousness."

Today we know better: capitalism and liberal democracy did win. We reached the End of History (TINA, for short). :-)

Babu said...

I created an art laughter curve in three dimensions. The first two dimension show a curve depicting maximal tax receipts occurring at an optimal tax rate. The third dimension shows the maximal tax receipts declining year over year as economic growth is hampered by inequality in income and wealth.